The increasing disconnect between oil markets in Asia and
the West was highlighted again by Saudi Arabia, which boosted export prices for
a region that is the world's last hope for growth while cutting those for Europe
and the United States.
And it wasn't just a minor tweak the Saudis gave Asia for
crude cargoes for November lifting: they raised the premium for the main Arab
Light grade to a record high over the regional benchmark Oman/Dubai price.
This increase came despite a fire that shut down Royal Dutch
Shell's 500,000 barrel a day refinery in Singapore, which caused the company to
cancel the delivery of at least 4 million barrels of oil from Saudi Aramco.
While Shell's closure of its largest refinery for repairs roiled
spot markets by boosting the premium of Brent oil over Dubai as traders feared
excess supplies of Middle East crude, this sentiment didn't last long.
The Saudi decision to raise premiums for Asian refiners, who
buy more than half of the kingdom's crude exports, shows its confidence in the
strength of Asian demand.
Arab Light was raised to a premium of $2.70 a barrel over
Oman/Dubai, 35 cents above the previous record high of $2.35 in November 2007.
At the same time, the price for November-loading Arab Light
for US customers dropped to a discount of 20 cents a barrel to the Argus Sour
Crude Index from a premium of 20 cents the prior month.
For Northwest Europe, the discount doubled to $1.40 a barrel
to the weighted Brent average for November from a discount of 70 cents for
The obvious conclusion from the Saudi pricing is that they
are charging more to customers in Asia because demand from the region is
strong, while they are cutting prices for Europe and the United States to try
and hold up demand in those regions.
This fits with what physical oil traders in Singapore
report, namely that there is no let up in demand for actual oil cargoes in the
region, Shell's travails notwithstanding.
Furthermore, the premium of physical Oman crude cargoes over
the benchmark Dubai price has remained at elevated levels, trading at $2.50 a
barrel on Wednesday, slightly down from $3 on Sept. 29, the peak so far this
But what is more interesting is that this spread slumped to
a discount of $1.75 in September 2008, at the height of the global financial
crisis and as crude was plunging from its record above $147 a barrel down to
around $34 in December that year.
If demand for crude in Asia was showing any sign of easing,
it would be expected that the premium for physical cargoes would be eroding
rather rapidly, which is so far not the case.
A further sign that demand remains strong is that Chinese
refiners booked eight more Very Large Crude Carriers, each capable of holding
some 2 million barrels of oil, in the spot market in September than they did in
Of course, it is possible that they reduce term cargoes, but
this seems unlikely given that Chinese refineries have been coming back on line
after maintenance and there is also the likelihood that they are taking
advantage of cheaper crude prices to build inventories.
Chinese trade figures for September should be released
around Oct. 8 and it would be a surprise if they showed any decline from
August's 4.95 million barrels a day.
So, if Asian demand is holding up so well, the question
becomes whether this can be sustained, or whether the gloom engulfing Europe
will spread east as well.
A renewed recession in the developed world would undoubtedly
hit oil demand in Asia, but unless it's a severe recession, the impact may be
more muted that what happened in 2008.
China's oil imports did slip into negative territory after
the collapse of Lehman Brothers sparked the financial crisis, with year-on-year
growth dropping in November 2008, recovering in December and then falling from
January to March 2009.
But they rebounded very quickly thereafter, culminating in
year-on-year gains of 42 percent and 48 percent in July and December of 2009
What this shows is that even if China is forced by a
recession in the West to curb its oil demand growth, it likely won't last for
(Clyde Russell is a Reuters market analyst. The views
expressed are his own.)